Category Archives: Managerial Econ

What’s the truth? Some experts say that terminals must be able to handle giant ships and therefore few customers, or fail. Olaf Merk (of the OECD) says it looks like a ‘monopsony’; a port has only one or very few customers. Actually according to Alan Manning [1], who ‘wrote the book’ on monopsony, a monopsony simply means that there is little elasticity of supply (of incoming containers i.e. ships) for the port.

The classic monopsony situation occurs in labor supply; the ‘company town’. It used to be seen in mining and very early, in manufacturing. In a company town, if you want to work, you have to work for the one employer. The firm must raise wages for all employees if it needs more than are available at the town. If it needs fewer employees, it can drop wages. Manning’s book defines labor monopsony as any case in which the labor supply (of workers) is inelastic (relatively vertical supply curve) while labor demand by the employer is elastic (downward sloping demand for labor).

What makes for inelastic labor supply? In the company town it happens because workers feel they don’t have mobility flexibility– it’s too far to the next place to work. But monopsony can happen for lots of reasons– discrimination, for one, can limit workers’ ability to get a different job. In fact, any condition that prevents workers from seeking other work, and thereby constricting individuals’ market for jobs, suffices. Examples include safety on the job, or most recently in the news, forcing truck drivers to lease their trucks through a drayage firm. The huge lease obligations pin the drivers to the job, and they lose control of work conditions and in the case of trucking, pay scales as well, since the drayage work in US ports is often piece work rather than (often unionized) pay by the hour.

In the port example the port is the labor supply– if the port is forced to upgrade to support ULCC ships in the 17-20KTEU range, it will be captive to those carriers that wish to run those big ships to it. These consume so much port capacity that the port will not be able to solicit other jobs from smaller ships. If it does, congestion will result. The very few carriers calling there with their ULCCs will demand lower prices to land, and the port ‘wage’ will decline. That naturally also affects their profitability.

And the ports that don’t adapt to the large ships will not be able to get work at all, or nowhere near as much. It’s like the people living too far from the company town (on the remote farms) who will fall out of the labor market for that firm.

Dan Gilmore’s take on the latest report from CSCMP on the state of logistics. A copy would be good reading, but you have to be a CSCMP member to get it free.

One interesting chart is this one showing innovations. It’s a classic innovation grid showing estimated impact vertically, and when it’s likely to be mainstream horizontally. The authors think co-opetition in supply chains, a high-impact innovation, is going to be mainstream in a couple of years. While I agree it has high impact potential, I think it’s a lot farther off than that. Especially in the US, we seem to be reverting to an unregulated world where markets rule, and this makes it very hard to hold cooperative schemes together. Similarly, Brexit blows apart many attempts at cooperation cross-border, and as nations start trying to foist their local problems off on others we’ll see natural reactions.

Logistics Costs as Percent of GDP Down Again in 2016, Falling in Relative and Absolute Terms

A standard like this could radically change the ocean container shipping business. It would affect landside operations as well.

Among other things it proposes a new form of smart shipping container called a pi-container, which would be able to interact with its contents as well as with external systems to relay many facts about both the products states and the cargo position. The smart container would also be sized much smaller than a standard ocean shipping container, to support smaller package transport better, and to allow greater unitization and simpler and more automated transloading capability.

But ocean carriers have the largest upfront investment in their standardized container specs, since they must be designed into ships. It would be very disruptive to have to replace all the current ships, so the path to adoption is clearly long, but the push is coming in some form. The same goes to some extent for air, rail and truck, but since they often handle smaller product unit sizes anyway and the capital equipment is less costly (except in the case of air, which uses smaller custom containers anyway, and do not match the remaining standards). In the case of air, cargo is frequently carried in passenger planes so the cost is covered by the people not the cargo. And a lot of air freight is package transport anyway since small size and high value are prerequisites for the much more costly air freight.

I think attention needs to be paid to the economics of migrating to the standard. In the case of the shipping container the economics drove the transformation. Economics must drive progress on a new model for transport as well.

There are some real heavyweights involved in the initiative. Their website is below. It is intended as an open standard, that would encourage all carriers and shippers to use the ideas to simplify cooperation and handling of products during shipment, as well as increase visibility to the discrete product level and allow finer sensing of the many quality dimensions products of varying sorts need during shipment and delivery.